Evidence Based Investing: The Importance of Education

It is our desire and intent to educate clients about how capital markets work and to provide them with the information necessary for their financial well-being.

The advice to follow an evidence-based approach to investing is significantly different from most of the advice heard on Wall Street and in the financial media. It also is different from the strategy followed by the typical individual investor. Therefore, we believe it is extremely important to be aware of the academic research demonstrating that markets are generally highly efficient.

A large number of studies (below) have shown that it is highly unlikely investors will be able to exploit market inefficiencies after accounting for the expenses of the effort. It is essential to know how a well-diversified portfolio can help manage risk, a message that often bears repeating as asset classes come in and out of favor over time. The same sentiment applies to understanding how attempts to time the market — either in terms of individual securities or asset classes — typically lead to realizing lower returns than those available from a buy, hold and rebalance strategy.

Because our investment approach is different from the average investment advisor, it is crucial for you to understand why we recommend it. Put simply, knowledge is the key to discipline. For example, in the late 1990s, when the growth asset class outperformed the value asset class, it became tempting to pour everything into that single asset class. Those who do not possess a basic understanding of evidence-based investing are more likely to quickly become dissatisfied when their portfolio underperforms the latest hot asset class.